Food for thought: investing in China’s F&B industry

China’s obsession with food makes its food and beverage industry a particularly appetising prospect for potential foreign investors. However, although China has a huge consumer base—many of whom are already turned on to foreign cuisine—Rosario Di Maggio, Associate Director of Vistra says that this lucrative industry is fraught potential pitfalls.

China’s megacities now offer a huge variety of international cuisines. With every passing month new and exotic restaurants are opening in first-tier cities, with many internationally-renowned chefs launching flagship venues.

Shanghai is leading the charge with more than 58,750 restaurants spanning at least 10 regional and 11 international cuisines. Beijing, Guangzhou and Shenzhen are all following closely behind, with Chengdu, Chongqing and many other large cities looking set to catch up in the coming years. In these cities you no longer need to seek five-star hotels to savour a decent steak, and the habit among Guangdong’s foreign residents spending weekends in Hong Kong to eat Italian or French fine-dining cuisine is much less common compared to a few years ago.

Foreign cuisine in China is no longer about exclusive restaurants for rich expats and wealthy locals though, China’s expanding middle class are increasingly demanding more diverse dining options. As the Chinese saying goes, “food is the first necessity of the people”, and this surge in demand has prompted a mushrooming of a variety of new restaurants at all price ranges, including Irish and English pubs, German and Belgian breweries, Italian, French and Spanish fine dining venues, and Vietnamese, Thai and Japanese restaurants.

Numerous market research studies show that attitudes of Chinese consumers have changed dramatically over the past decade, leading to new generations of young consumers who are increasingly familiar with foreign food products. Continued, increased consumption of a wide variety of foods in China has developed a growing acceptance among Chinese consumers towards foreign cuisines. China’s expanding middle class—estimated to make up 40 per cent of the population by 2020—with larger disposable incomes will see this trend continue, and rising public awareness of food safety issues means that Chinese consumers are becoming more willing to pay for quality food products too.

Over the last 15 years, the food and beverage (F&B) sector has seen huge growth, offering tremendous opportunities for local and foreign investors alike. International heavyweights, such as food conglomerate YUM! (which owns brands Taco Bell, KFC and Pizza Hut), Starbucks, McDonalds and Häagen-Dazs, are invading every corner of every central business district in major Chinese cities.

It is amazing to see how foreign small businesses and entrepreneurs have capitalised on the opportunities that this has presented and reaped varying degrees of success in the F&B industry, a sector that is often considered relatively easy to enter.

Many of these investments actually come from individuals or companies outside of the F&B industry who have accumulated funds in trading and manufacturing or professional services. History has proven some of them to be right, with a handful expanding their businesses with small chain outlets, sometimes even beyond their city of origin, which is extremely challenging in a market as fragmented as China’s. We have witnessed the success of Element Fresh and Wagas expanding first in Shanghai and later in Beijing and Guangzhou, or FG Fine Foods in Guangzhou.

According to Neil Wickers, Managing Director of Pizza Express International, the key to success when expanding outside of your established market is “a deep understanding of the cultural nuances and local consumer tastes and preferences.” However, adapting areas of the brand proposition whilst remaining true to the global brand, presents the biggest challenge. “It’s important to take your time to set up each restaurant successfully before rolling out the concept,” he says.

Pizza Express established 22 restaurants in Shanghai and Hong Kong before entering Beijing (its 500th restaurant globally). “We had the benefit of experience of operating in these two cities, whilst simultaneously undertaking consumer research to understand Beijing as a market in its own right,” says Wickers.

But for every success story how many have gone bust?

No matter if the investor is a venture capitalist looking to launch a brand new chain of restaurants or a small, private investor with no experience in the F&B industry, whether the location is Xintiandi in Shanghai, Houhai in Beijing, Futian in Shenzhen or Zhujiangxinchen in Guangzhou, the challenges are numerous. They are not limited to a strong set of local competitors as in the West, here they include issues such as a lack of supply transparency and a complex regulatory environment. The possibility that regulations will be applied or enforced inconsistently has plagued business owners and has often resulted in their failure. While some of these issues are difficult to foresee and deal with, others just need the right amount attention to be mitigated.

A common mistake by both large and small investors trying to open their chain of restaurants or coffee shops, is to use the restaurant premises as their registered office. In addition to requiring the investor to pay for very expensive premises for several months before they are able to actually fully utilise them (the registration process might take up to nine months, assuming that everything goes smoothly) it also ties any future risk of that particular location to the whole group. Imagine the scenario where the first restaurant location happens to be a failure or, for whatever reason, there is a need to relocate it. If the premises are also the main location for the whole company, the process of relocation could end up being extremely long and painful.

An alternative would be to register what is usually referred to as a Catering Management Company in regular office premises. This would allow the investor to obtain the full set of licenses without having to pay for large, centrally-located and expensive retail premises while this process takes place. In the meantime, the process of finding the right location for the actual restaurant can be undertaken, and the pre-incorporation approval stage can be entered into, saving the investor precious time and money. This practice will also accelerate the process of being able to issue invoices, hire staff and open bank accounts.

Another major challenge for foreign-invested F&B companies is related to hiring local employees and being able to retain them with the right wages and compensation packages. In a highly competitive labour market, where the required industry skills are relatively low, employees often leave without giving much notice. This places management under the continuous stress of having to constantly find new hires. Training costs are high, and this cost is wasted when good employees who have received foreign business training decide to leave for higher paying jobs. However, this is an aspect that can be mitigated by ensuring that the right contracts, staff handbooks, packages and bonus structures are in place.

Finally, as many with some experience in the industry are aware, investors should make sure that lease agreements are well drafted. At the same time they should be prepared to expect the worst from the landlord. In too many cases, successful businesses have been handed a hike in rent of up to 40 per cent without sufficient explanation or have been pushed to move out, only to discover a few weeks later that the landlord was trying to run a similar business at the same premises. Some particularly naive foreign investors didn’t even make it to their opening before their landlord threw them out and kept their design and business model.

As with all business ventures in China, investors looking to break into the F&B industry should take professional advice, proceed with realistic expectations and keep their eyes and ears open.

Vistra is a global, independent provider of trust, fiduciary, corporate and fund services, with 30 offices in 22 jurisdictions. In China, Vistra has offices in Shanghai, Beijing, Guangzhou and Shenzhen specialising in company formations, ongoing administration and support services such as bookkeeping, accounting, tax-filing, HR administration, payroll processing and other corporate services for our international portfolio of clients.

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